In its winter edition of the semiannual Deloitte Review, Deloitte LLP released a study of the impact of environmental, social, and governance (ESG) issues on business performance and investor behavior.

“Finding the Value in Environmental, Social, and Governance Performance” reviews evidence showing that environmental, social, and governance (ESG) issues can result in fundamental shifts in a company’s financial health, management, and culture. Companies that are demonstrably prepared for ESG shocks are better positioned to mitigate the downside risks.

The study notes that ESG issues can stem from direct operational risks, supply chain risks, and product risks. Consequently, an ESG event at one company can also negatively affect returns of its industry peers, as was seen when the 1984 Bhopal chemical accident resulted in the US Emergency Planning and Community Right-to-Know Act (EPCRA).

Short-term negative ESG events tend to create the greatest performance impacts. Example: the average drop in a company’s market value quickly following negative news of human right issues was $892 million.

Investors have shown a stronger response to negative ESG events over the past few decades. On average, between 1980 and 1989, negative ESG events caused a -0.42% drop in stock price. In contrast, over the ten years between 2000 and 2009, the stock price of companies experiencing negative ESG events was -1.12%, while the stock prices of companies with positive ESG performance rose on average by +0.84%.

Evidence from Deloitte’s study shows that a company’s disclosure of ESG performance can create an “ESG halo” which serves to partially protects its stock value against ESG issues.

“ESG is a proxy for risk that is not priced in, and companies that better manage these risks can deliver returns with greater certainty,” according to Dan Hanson, managing director at BlackRock.

Mention of specific companies or securities should not be considered a recommendation to buy or sell that security. Past performance is never a guarantee of future results.